FACULTY OF LAW GHENT UNIVERSITY ACADEMIC YEAR 2013-2014 T -P F I HIRD ARTY UNDING IN NTERNATIONAL C A OMMERCIAL RBITRATION Master’s thesis in the ‘Master of Laws’ program Submitted by Thibault De Boulle (Student No. 00902551) Supervisor: Prof. Dr. M. Piers Commissioner: Prof. Dr. J. Erauw [Page intentionally left blank] i “[F]inancing of litigation and arbitration claims by third parties is neither new nor capable of being characterised in the rather black and white manner so often employed by press and academic writing. In reality, the practice is complex and multi-faceted.” C. Bogart, 20131 1 C. BOGART, “Third party funding in international arbitration”, Burford Capital 22 January 2013, www.burfordcapital.com/articles/third-party-funding-in-international-arbitration/#. ii [Page intentionally left blank] iii TABLE OF CONTENTS TABLE OF CONTENTS ........................................................................................................ iv PREFACE AND ACKNOWLEDGEMENTS ..................................................................... vii LIST OF ABBREVIATIONS USED ................................................................................... viii INTRODUCTION, SCOPE AND OBJECTIVES ................................................................. 1 FIRST PART – INTRODUCTION TO THIRD-PARTY FUNDING ................................. 4 Chapter I. Defining third-party funding ......................................................................................... 5 1. Third-party funding sensu stricto ............................................................................................... 5 2. Third-party funding sensu lato ................................................................................................... 6 2.1. Attorney financing ............................................................................................................................. 7 2.1.1. Pro bono ..................................................................................................................................... 7 2.1.2. Contingency fee arrangements ................................................................................................... 8 2.1.3. Conditional fee arrangements..................................................................................................... 9 2.1.4. Applicability to arbitration of the prohibitions against attorney financing .............................. 10 2.1.5. Relationship with third-party funding sensu stricto ................................................................. 10 2.2. Legal expenses insurance ................................................................................................................. 11 2.2.1. General ..................................................................................................................................... 11 2.2.2. Specialized forms of insurance ................................................................................................ 12 2.2.3. Relationship with third-party funding sensu stricto ................................................................. 12 2.3. Loans ................................................................................................................................................ 13 2.4. Assignment of a claim ...................................................................................................................... 14 2.5. Donations or free financial assistance .............................................................................................. 15 2.6. Conclusion ....................................................................................................................................... 15 Chapter II. Identification of industry participants ...................................................................... 16 1. Potential clients ......................................................................................................................... 16 2. Potential funders ....................................................................................................................... 17 Chapter III. History ........................................................................................................................ 18 1. Growth in the use of third-party funding in domestic litigation ............................................... 18 2. Availability of third-party funding in international commercial and investment arbitration.... 21 Chapter IV. Why third-party funding? ........................................................................................ 24 1. General ...................................................................................................................................... 24 2. Access to justice ....................................................................................................................... 25 2.1. General ............................................................................................................................................. 25 2.2. Impact on settlements ...................................................................................................................... 27 3. Maintain financial stability ....................................................................................................... 29 4. Attractive investment from a funder’s perspective ................................................................... 30 iv 5. Assessment of the merits of a claim ......................................................................................... 31 6. Third-party funding in international investment arbitration ..................................................... 34 Chapter V. Due diligence ................................................................................................................ 36 1. Funders ..................................................................................................................................... 36 2. Clients ....................................................................................................................................... 37 SECOND PART – ISSUES REGARDING THIRD-PARTY FUNDING ......................... 38 Chapter I. Legal ethics and doctrines and third-party funding ................................................. 39 1. National law limitations on funding agreements ...................................................................... 40 1.1. Maintenance and champerty ............................................................................................................ 40 1.1.1. Definition ................................................................................................................................. 40 1.1.2. History ...................................................................................................................................... 40 1.2. Usury ............................................................................................................................................... 44 1.3. National limitations in international arbitration ............................................................................... 45 1.4. Conclusion ....................................................................................................................................... 47 2. The attorney’s ethical duties ..................................................................................................... 47 2.1. Privilege ........................................................................................................................................... 48 2.2. The beneficiary of the attorney’s ethical duties ............................................................................... 50 2.3. The lawyer’s ‘duty-to-know’ and ‘duty-to-tell’ about third-party funding ...................................... 51 Chapter II. Full disclosure of third-party funding agreements? ................................................ 53 1. Is there a disclosure obligation for third-party funding? .......................................................... 53 2. Rationale behind a disclosure obligation of third-party funding agreements ........................... 54 2.1. Preventing conflicts of interest ........................................................................................................ 54 2.1.1. Three-cornered relationship between funded party – funded party’s lawyer – funder ............. 55 A. Control over the proceedings .................................................................................................... 55 B. Potential conflicts of interest .................................................................................................... 57 C. How to avoid conflicts of interest from occurring? .................................................................. 61 2.1.2. Independence of arbitrators ...................................................................................................... 63 A. General ..................................................................................................................................... 63 B. Potential conflicts of interest .................................................................................................... 64 C. Current applicable rules ............................................................................................................ 66 D. How to avoid conflicts of interest from occurring? .................................................................. 68 2.2. Disclosure obligation to decide on allocation of costs or security for costs..................................... 69 2.2.1. Allocation of costs in international arbitration ......................................................................... 70 2.2.2. Security for costs in international arbitration ........................................................................... 72 2.2.3. Should the arbitral tribunal take funding agreements into account when deciding on the allocation of costs and security for costs? .......................................................................................... 73 A. General ..................................................................................................................................... 73 B. Critics ....................................................................................................................................... 74 C. Proponents ................................................................................................................................ 76 v 2.3. Giving arbitral tribunals the opportunity to assess the need to impose a duty of confidentiality on funders .................................................................................................................................................... 80 2.3.1. Confidentiality in international arbitration ............................................................................... 80 2.3.2. Are third-party funders bound by a duty of confidentiality? .................................................... 81 3. Feasibility of a disclosure obligation ........................................................................................ 82 3.1. Issues with establishing a disclosure obligation ............................................................................... 82 3.2. Funders’ perspective on disclosure .................................................................................................. 84 4. Proposal of a disclosure obligation ........................................................................................... 87 4.1. Arbitrator’s duty to disclose ............................................................................................................. 88 4.2. Parties’ duty to disclose ................................................................................................................... 88 4.3. Conflicts of interest check by the arbitral institution ....................................................................... 89 4.4. Prohibition on taking third-party funding relationships into account by the arbitral tribunal .......... 90 4.5. Applicability to the UNCITRAL Arbitration Rules ......................................................................... 91 5. Conclusion ................................................................................................................................ 93 Chapter III. Regulation of the funding industry .......................................................................... 94 1. General ...................................................................................................................................... 94 2. Code of Conduct for funding of resolution of disputes within England and Wales ................. 97 2.1. What is it? ........................................................................................................................................ 98 2.2. Criticism ........................................................................................................................................ 100 2.3. Conclusion ..................................................................................................................................... 102 CONCLUDING REMARKS ............................................................................................... 103 BIBLIOGRAPHY ................................................................................................................ 106 I. Legal doctrine ............................................................................................................................ 106 1. Books ...................................................................................................................................... 106 2. Contributions in law journals .................................................................................................. 107 3. Online sources ........................................................................................................................ 112 4. Miscellaneous ......................................................................................................................... 119 II. Case law .................................................................................................................................... 121 ANNEX – THE ASSOCIATION OF LITIGATION FUNDERS OF ENGLAND AND WALES: CODE OF CONDUCT FOR LITIGATION FUNDERS ................................. 123 NEDERLANDSE SAMENVATTING VAN DE MASTERPROEF CONFORM ARTIKEL 2.5.3 VAN HET REGLEMENT MASTERPROEF ....................................... 125 vi PREFACE AND ACKNOWLEDGEMENTS This master’s thesis is the final chapter of my law degree at Ghent University. Being drawn to the fascinating world of international commercial arbitration and with a healthy interest in international business, third-party funding (“TPF”) seemed like, and proved to be, a perfectly suitable multidisciplinary subject matter for a master’s thesis. Writing a thesis on a topic where a substantial part of the available information is dominated by interest groups (i.e. third-party funders) entails some pitfalls. Among other hazards, there is an inherent risk that one could lose its sense of nuance, which could have a detrimental influence on the impartiality of the analysis. Nevertheless, I have tried to stick to the facts and reference the views of both the enthusiastic advocates and the fierce opponents. Furthermore, this preface gives me the opportunity to express my sincere gratitude to some people. First and foremost, I wish to thank my supervisor, Professor Maud Piers, for endorsing an open door policy and for her invaluable comments, guidance, advice and editorial assistance in this endeavour. Many thanks as well to Pascal Hollander2 and Professor Eric De Brabandere3 for taking the time to shed some light on this utterly interesting subject during an interview. Furthermore, I wish to thank Professor Catherine A. Rogers for providing me a copy of a chapter in her forthcoming book,4 which has been extremely helpful in understanding some of the more cumbersome issues regarding the respective topic of this thesis. Finally, I would like to express a special thank you to Sara, my parents, my brother and my friends who are very dear to me and who supported me, not only during the writing of this thesis, but also during the entirety of my education. I could not have written this thesis without them and am forever grateful for their kind understanding and moral support. Ghent, 7 May 2014 Thibault De Boulle 2 Interview with Pascal Hollander on 15 April 2014. 3 Interview with Professor Eric De Brabandere on 23 April 2014. 4 C. ROGERS, “Gamblers, Loan Sharks & Third-Party Funders” in C. ROGERS, Ethics in International Arbitration, Oxford, Oxford University Press, forthcoming June 2014. vii LIST OF ABBREVIATIONS USED ABA American Bar Association ALF Association of Litigation Funders of England and Wales ATE After-the-event BTE Before-the-event CFA Conditional fee agreement IBA International Bar Association GDP Great Britain Pound ICC International Chamber of Commerce ICDR International Centre for Dispute Resolution ILR Institute for Legal Reform LCIA London Court of International Arbitration LEI Legal expenses insurance LFA Litigation funding agreement PCA Permanent Court of Arbitration TPF Third-party funding U.K. United Kingdom UNCITRAL United Nations Commission on International Trade Law U.S. United States USA United States of America USD United States Dollar USSC Supreme Court of the United States viii INTRODUCTION, SCOPE AND OBJECTIVES INTRODUCTION, SCOPE AND OBJECTIVES 1. TPF, which has existed in litigation in various forms and in several jurisdictions for quite some time, is now one of the ‘hot topics’ in international arbitration.5 The heretofore fledgling and virtually unknown phenomenon with only a few years of history is evolving into a veritable and thriving practice with each passing day. It is gradually gaining traction and credibility in the collective consciousness of the global legal community and it will inevitably become a feature of international commercial arbitration6 due to both the exponential growth of international investment and commercial disputes over the last fifty years and the rising costs associated with submitting a dispute to arbitration. This growth parallels the globalisation in international commerce, where international commercial arbitration is gradually becoming the most favoured method of resolving commercial disputes. 2. A considerable number of parties (referred to in industry jargon as “funded party”) in international arbitrations – whether engulfed by financial difficulties or otherwise7 – are now exploring the possibility of using TPF to provide the necessary capital to finance their meritorious claims, in return for a percentage of the compensation granted to the funded party if successful, whether by settlement or arbitral award. The financing of the costs associated with pursuing a claim by a third party – who only invests in the proceedings with the hopes of making a profit and has no interest in the substantive issues of the dispute, other than a pecuniary one – is becoming pivotal and indispensable for impecunious claimants and defendants to resolve their disputes with arbitration. In summary, international arbitration continues its dramatic growth on the one hand, and on the other hand, the ability to prosecute the arbitration claims is shrinking. 3. Notwithstanding the clear advantages of TPF, it is undeniable that TPF has its share of shortcomings and a lot of problematic issues remain open and are even growing. The key predicaments are the fact that the industry is virtually unregulated and that neither the funded parties, nor the third-party funders (“funder”)8 are subject to a mandatory disclosure obligation regarding the 5 The author encourages readers to consult the following source, in which six short introductory films about TPF as such, and the ‘hot topics’ regarding TPF can be found. FOX WILLIAMS, Third Party Litigation Funding; The debate, 21 July 2011, www.foxwilliams.com/news/230/. 6 Some funders report an increase of ten percent of their investments in international arbitration disputes. See e.g. C. ROGERS, “Gamblers, Loan Sharks & Third-Party Funders” in C. ROGERS, Ethics in International Arbitration, Oxford, Oxford University Press, forthcoming June 2014; S. SEIDEL, “Maturing Nicely”, CDR May 2012, http://fulbrookmanagement.com/wp-content/uploads/2012/05/1May2012-Maturing-Nicelyb.pdf. 7 Financially healthy companies may rely on TPF for reasons other than paucity of sufficient finances (infra 29- 30, nos. 77-78). 8 Third-party funders have been referred to with different names, such as third party financiers, litigation funders, litigation financing entities, alternative dispute funders and third-party funders. A definitive name has thus not been agreed upon. The general terms of third-party funder and funder will be used throughout this thesis. 1